May 31 (Bloomberg) -- This week’s slide in Japanese stocks
raises the stakes for Prime Minister Shinzo Abe’s planned revamp
of business regulations as officials sought to sustain
confidence in efforts to revive the economy.

The Topix Index of shares yesterday tumbled 3.8 percent, a
week after careening down 6.9 percent, the most since the March
2011 earthquake and tsunami. The index’s gains over the past six
months were pared to 45 percent, from as much as about 63
percent earlier this month.

The waning in the rally coincides with a jump in government
bond yields as central bankers attempt to stoke inflation in a
nation with 15 years of entrenched consumer-price declines. With
the Bank of Japan already committed to doubling the monetary
base in two years, the next step to justify expectations for an
economic rebound is a reform package from Abe that unleashes
business investment, according to analyst Hideo Kumano.

“There have been overblown expectations for the BOJ’s
monetary policy -- sentiment is waning and that’s being
reflected in stock-price moves,” said Kumano, executive chief
economist at Dai-ichi Life Research Institute Inc. in Tokyo and
a former BOJ official. “What the government can do to boost
stock prices is steadily implement its growth strategy. There
are no other remedies.”

Best Performer

Japan’s equity market, best-performing major bourse this
year, entered a correction when the Topix closed at 1,134.42,
the lowest level since April 19 and down 11 percent from the
five-year high reached on May 22. A correction is defined as a
decline of more than 10 percent from a recent peak. The gauge
was up 1.5 percent as of 9:12 a.m. today.

Economy Minister Akira Amari, who last week said there was
“no need to be perturbed” by the May 23 tumble in stocks,
yesterday said that the government’s growth strategy is the most
important of its three-pronged approach to reflating the economy.
He said he’s not concerned by the stock turbulence.

Along with monetary and fiscal stimulus, Abe, 58, plans a
structural reform package to be unveiled next month. Amari told
reporters yesterday that policy makers will achieve economic
recovery through boosting businesses’ capital spending. The
recipe of Abenomics started propelling equities in November,
weeks before Abe’s party swept to victory in national elections,
installing him as prime minister for the second time.

Pace ‘Crucial’

“The pace of Abenomics is crucial -- as investors see the
Japanese economy recover, equities will start to rise again,
even with normalizing bond yields,” Morgan Stanley MUFG
Securities Co. economists led by Robert Feldman in Tokyo wrote
in a report to clients this week. “The longer it takes for
Abenomics to succeed, the longer markets will languish.”

Abe said yesterday that consumption and corporate profits
are improving.

Yields on benchmark 10-year government bonds closed at
about 0.89 percent, up from 0.56 percent four weeks ago and
0.455 percent on April 4, the day that Bank of Japan Governor
Haruhiko Kuroda unveiled his plan to achieve 2 percent inflation
in two years. Consumer prices, excluding fresh food, fell 0.4
percent in April from a year before, a government report showed
today.

Yield Threat

A rapid rise in yields can affect the economy and people’s
livelihoods, and the central bank will deal with the increase
appropriately, Amari said.

The central bank yesterday increased the frequency of its
monthly asset purchases after bond-market participants told
officials that changes were needed in the wake of increased
volatility. The BOJ said in a statement that it will buy
government debt about eight to 10 times a month starting in June,
compared with about eight times now.

Officials have been maintaining close dialogue with the
market, and the BOJ has been carefully monitoring the situation,
Deputy Governor Hiroshi Nakaso said in Tokyo yesterday. Nakaso
said that he doesn’t expect a surge in yields.

Success with fiscal stimulus and structural reform, the
other arrows in the Abenomics quiver, will help the BOJ meet its
inflation target, Nakaso said.

Abe said May 17 that he aims to get annual private
investment back to 70 trillion yen ($695 billion), the level
before the depths of the 2008 financial crisis, through
deregulation, taxes, spending, and equipment-leasing deals. The
figure was an annualized 65.15 trillion yen in the first three
months of 2013, down for a fifth straight quarter.

Plan Coming

The prime minister also last week outlined a target of
tripling infrastructure exports to about 30 trillion yen by 2020.
Abe has said he will reveal his full growth plan ahead of the
Group of Eight summit in Northern Ireland on June 17-18.

Outlines of the third-arrow initiatives encompass plans
from boosting the participation of youth and women in the
workforce to making it easier for new businesses to start up and
joining the Trans-Pacific Partnership trade talks.

“The policies could include measures that contribute to
structural changes, such as the appointment of independent
directors,” Naoki Kamiyama, an equity strategist at Bank of
America Merrill Lynch, wrote in a report this week. Kamiyama
said the focus on economic reform is likely to continue after
elections to the upper house of parliament in July, which offer
Abe’s ruling coalition the opportunity of securing a majority in
both chambers of the Diet.

Steel Demand

Business investment has yet to join exports and consumer
spending in aiding GDP growth, which accelerated to a 3.5
percent annualized pace in January-to-March, the fastest in a
year. Steelmakers are starting to see the impact of Abenomics as
demand rises, Hiroshi Tomono, chairman of the Japan Iron and
Steel Federation and president of Nippon Steel & Sumitomo Metal
Corp., said today in Tokyo.

“We are going to formulate a growth strategy as a third
arrow that will expand private corporate investment and
consumption in order to stimulate Japan’s 500-trillion-yen
economy and make it grow,” Amari said in a speech today. “This
is the core of Abenomics.”